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Proposed guidance on auditing financial statement disclosures

May 16, 2014

The International Auditing and Assurance Standards Board (IAASB) has released an exposure draft of proposed changes to various International Standards on Auditing (ISAs) to better deal with disclosures in financial statement audits. The exposure draft seeks to achieve an appropriate focus by auditors on disclosures and encourage earlier auditor attention on them during the audit process, including disclosures where the information is not derived from the accounting system.

The exposure draft, Addressing Disclosures in the Audit of Financial Statements, follows an earlier discussion paper, and proposes changes to a number of ISAs.

Key proposals include:

Clarifying the meaning of the term "financial statements" to include all disclosures subject to audit, noting such disclosures may be found on the face of financial statements, included in related notes, and where permitted by the financial reporting framework, incorporated by cross-reference.

New application material to assist in the establishment of an appropriate focus on disclosures in the audit, and to bring forward consideration of disclosure to earlier in the audit process.

Enhancements to encourage a more robust risk assessment around disclosures, e.g., considering assertions for related disclosures when considering classes of transactions, events and account balances, considerations about the source of information for disclosures, and clarifying the nature of potential misstatements in disclosures (including nonquantitative disclosures)

New application material to clarify and explain the expectations of an auditor when evaluating misstatements and forming an opinion, highlighting the types misstatements that might be identified, explaining that disclosure misstatements need to be accumulated, providing examples of disclosure misstatements that may affect the understandability of the financial statements, and how misstatement disclosures affect the evaluation of the presentation of the financial statements.

The IAASB acknowledges that the issues around disclosures are pervasive and strongly linked to other initiatives, such as the IASB's disclosure initiative. The exposure draft notes:

In agreeing to this project, the IAASB acknowledged the view that many of the issues around disclosures cannot be solved by the IAASB alone. Moving forward in areas such as materiality will require collaboration and cooperation between many interested stakeholders, including accounting standard setters, regulators, preparers and users, for an effective response. The IAASB therefore has had active liaison and outreach with such stakeholders. For example, the IAASB has contributed to related initiatives of the International Accounting Standards Board (IASB), such as its work on disclosure frameworks and materiality. The IAASB will continue to closely follow relevant developments and activities of others to further inform its future activities.

Notwithstanding these observations, the IAASB believes the changes proposed in the exposure draft are necessary to proceed with "as an appropriate response to the concerns raised about the need to clarify the expectations of auditors when auditing financial statement disclosures, as well as to the need for additional guidance to assist auditors in addressing the practical challenges arising from the evolving nature of disclosures." In addition, the IAASB considers that the exposure draft's proposals to place a focus on disclosure earlier in the audit process may improve disclosures through companies also focusing on disclosures earlier in their financial statement preparation process.

The exposure draft is open for comment until September 11, 2014. Click for IAASB press release (link to IFAC's Web site).

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